Merkel Government Changes Organschaft Rules
Ulrich Siegemund, Taxand Germany, analyses the government's recent Tax Bills, which deal with the taxation of fiscal groups and alter the rules governing real estate transfer tax (RETT) blocker structures.
While the Social Democrats, the Greens, and the left wing party run their campaign with plans to increase tax rates for high income individuals and even want to revitalise the net worth tax, the government dedicates several Tax Bills to technical tax issues which certainly will not impact public discussions before the elections. Only the plan to hinder RETT blocker structures is a reaction to the appreciation of a lack of fairness. Individuals buying their home have to inevitably pay RETT, which in most of the states in Germany has recently been increased from 3.5% to 4.5 or even 5%, whereas corporate investors very often avoid RETT by implementing RETT blocker structures. The Tax Bills include some very important changes for international investors in Germany.
Taxation of fiscal groups (German Organschaft)
The German taxation of fiscal groups, (Organschaft) is based on an agreement between the head of a fiscal group and its subsidiary being a part of the fiscal group, the profit and loss absorption agreement. Fiscal groups have been challenged in many situations by the German fiscal authorities due to the exact required wording of this agreement. This caused tax leakage in many cases and tax contingencies and litigation with respect to tax assessment notices in many other cases.
The Tax Bill now requires that the profit and loss absorption agreement signed by a GmbH being the subsidiary in an Organschaft refers to this article 302 in the effective version which would mean that a change of this legal provision indirectly also changes the agreement due to the dynamic reference.
The fiscal group very often also failed due to even minor mistakes in the balance sheet, resulting in an incorrect amount of profit or loss to be absorbed. According to the wording of the Tax Bill, those mistakes may not be destroying the fiscal group anymore, if the financial statements have been audited by a CPA and the mistake is corrected in the following balance sheet. Those amendments of the actual rules would apply retroactively for open cases and would help taxpayers whose tax groups failed in the past as long as the respective tax assessment notices are still open for change. This is far removed from what was announced as a reform of the Organschaft rules by the Merkel government when they started in 2007. At that time the agreement between the Christian Democrats and the Liberals for the election period was to modernise the rules on taxation of fiscal groups and to harmonise it with what the other EU countries have enacted. This intention had been confirmed early this year in the 12 Measures Plan. This might mean that the big reform of the fiscal group taxation rules will not be enacted during this election period anymore. Anyhow it seems clear that implementation is not intended before 2016.
Loss carry backs
Loss carry backs are now limited to EUR511,000 ($660,000). The Tax Bill intends to increase this amount to EUR1 million, which would be a benefit for all taxpayers being profitable and becoming loss making in their fiscal year 2013 or thereafter. This measure is one of those listed in the 12 measures plan and it is part of a plan to harmonise German and French tax law. France has done a step towards harmonisation in 2011 by copying the German minimum taxation system. Minimum tax rules do not limit the carry forward of losses but limit the utilisation of losses carried forward in a given year to EUR1 million and 60% of the exceeding profit.
12 Measures Plan
The good news about this Tax Bill and the others which have been brought on their way before or after the summer break is that some very severe changes which have been listed in the 12 measures paper for modernisation and simplification of the business tax system have not been pushed forward. This plan was published by members of the parties forming the coalition for the federal government in February 2012.
Strike against Real Estate Transfer Tax (RETT) blocker structures
The Merkel government has announced a law change that disregards certain structures set up to avoid RETT upon the acquisition of German real property in a share transaction. Under German law the acquisition of 95% or more of a company which owns German real estate is subject to RETT. While RETT cannot be avoided in the direct acquisition of a real estate asset (asset deal), the tax can be avoided in a share deal by just acquiring less than 95% of the shares in a property owning company or partnership. The basic RETT blocker structure, which is used very frequently to avoid this tax charge, works as follows: In case of a corporate real estate owning vehicle, the purchaser acquires 94.9% in the corporation directly. The remaining 5.1% are acquired by a special purpose partnership. This intermediary partnership is being held at 94.9% by the purchaser and at 5.1% by the seller or a second investor. The benefit is that an effective 99.74% of the interest in the property owning entity can be acquired without triggering RETT. All this is subject to many pitfalls in the detail but nonetheless has been established as a market practice.
With the elections only a year off, it could be seen as predictable that the current government is focusing on technical tax issues to steer clear of unwanted attention. Similarly, their move to target RETT blocker structures will grant a positive reaction from individual voters. However what is yet to be seen is their final standpoint on taxing corporates. It will be interesting to discover what tax incentives there will be for foreign investors, while juggling the reaction of the general public.
First published in the International Tax Review, October 2012